IT hardware PLI not attractive enough

Going ahead with the outlay of just Rs 1.6 lakh crore—rather than the originally-targeted Rs 3.2 lakh crore—would deal the exports target of Rs 2.45 lakh crore a big blow, with just a fourth of it expected to be realised.

Given how the response to the PLI (production-linked incentive) scheme for IT hardware has been less than enthusiastic, the government should go back to the drawing board rather than roll out the scheme at half the outlay that was originally envisaged. It needs to hike the incentives to at least twice the current levels. Going ahead with the outlay of just Rs 1.6 lakh crore—rather than the originally-targeted Rs 3.2 lakh crore—would deal the exports target of Rs 2.45 lakh crore a big blow, with just a fourth of it expected to be realised.

Indeed, the lukewarm response to the scheme isn’t really surprising given the less-than-exciting incentives of 2-2.5% over a four-year period. Given the basic customs duty (BCD) on 217 tariff lines covered under the IT Agreement (ITA-1) of WTO—which includes laptops and tablets—is zero, it is not at all surprising global players don’t feel it is worth their while to re-locate facilities out of China and Vietnam.

For a segment like IT hardware, where the global demand is fairly large, the outlay should have been closer to Rs 20,000 crore and not Rs 7,350 crore over four years; remember, the outlay for mobile phones is around Rs 40,000 crore. Also, in the case of the IT hardware segment, there is a localisation guideline that kicks in from the second year that requires PCBs, battery packs, cabinets and power adapters to be made locally. This clause would deter any manufacturer that does not have a manufacturing base in India from re-locating the production from another country. As we have seen in the case of mobile phones—where there is no localisation clause—it has been far easier for a Samsung, which has a big manufacturing base here, to achieve the incremental sales target; the others like Wistron and Foxconn have understandably not been able to do so since shifting the base from another country is not easy, especially given India’s very poor infrastructure.

The government should revamp the IT hardware PLI and put in place chunkier incentives, of closer to 3-4% and not the measly 2.2% that it is offering now; the incentive for the mobile phones is bigger, starting at 6% and going down to 4% in the fifth year, despite the fact that phones attract an import duty. Also, as in the case of mobile phones, the tenure for the IT hardware PLI too should be lengthened to five years. Unless the scheme is reworked with a significantly bigger outlay, much of the production will be sold in the local market, totally defeating the purpose of the scheme to promote exports. Most of the sales will be made to the government and PSUs, which are big buyers accounting for about a fourth of the demand, and some believe exports could be even smaller than the new target of Rs 60,000 crore. That would be unfortunate; there is no way India can hope to gain a fifth of the global production by 2025 as was targeted originally.

The rewards from the PLI scemes for India can be enormous; so, the government should not be overly concerned about the balance-sheet getting a little stretched. Given how the private sector is unlikely to invest meaningfully in greenfield capex and the government’s investments too can’t increase beyond a point, the PLI is a good way out. But without bigger incentives, not just for electronics but for other sectors too, global players won’t be persuaded to set up shop in India.